Skype, a voice over IP (VoIP) service, was first released in 2003 as a way to make free computer-to-computer calls, or reduced-rate calls from a computer to telephones. Support for paid services such as calling landline/mobile phones from Skype (formerly called SkypeOut), allowing landline/mobile phones to call Skype (formerly called SkypeIn and now Skype Number), and voice messaging generates the majority of Skype's revenue.

As of 2010, Skype was available in 27 languages and has 660 million worldwide users, an average of over 100 million active each month,[7] and has faced challenges to its intellectual property amid political concerns by governments wishing to control telecommunications systems within their borders.

The Skype software was originally developed by EstoniansAhti Heinla, Priit Kasesalu and Jaan Tallinn, who together with Janus Friis and Niklas Zennström were also behind the peer-to-peer file sharing software Kazaa.[10] In April 2003, Skype.com and Skype.net domain names were registered. In August 2003, the first public beta version was released.

One of the initial names for the project was "Sky peer-to-peer", which was then abbreviated to "Skyper". However, some of the domain names associated with "Skyper" were already taken.[11] Dropping the final "r" left the current title "Skype", for which domain names were available.[12]

In September 2005, SkypeOut was banned in China.[13] In October of the same year, eBay purchased Skype[14] for $2.6 billion.[15] (In 2011, the Ars Technica estimated the purchase price at $3.1 billion, not $2.6 billion.)[16] In December 2005, videotelephony was introduced.[17]

A Skype phone manufactured by SMC Network

In April 2006, the number of registered users reached 100 million. In October, Skype 2.0 for Mac was released, the first full release of Skype with video for Macintosh, and in December, Skype announced a new pricing structure, with connection fees for all SkypeOut calls.[18] Skype 3.0 for Windows was released.[19]

In 2006, a now-discontinued feature called "Skypecasting" was introduced. It allowed recordings of Skype voice over IP voice calls and teleconferences to be used as podcasts. Skypecasting remained in beta until it was discontinued. Skypecasts hosted public conference calls for up to 100 people at a time. Unlike ordinary Skype p2p conference calls, Skypecasts supported moderation features suitable for panel discussions, lectures, and town hall forums. Skype operated a directory of public Skypecasts. Skypecasts was discontinued from 1 September 2008.[20]

Throughout 2007, updates (3.1, 3.2 and 3.5) added new features including Skype Find, Skype Prime, Send Money (which allowed users to send money via PayPal from one Skype user to another), video in mood, inclusion of video content in chat, call transfer to another person or a group, and auto-redial. Skype 2.7.0.49 (beta) for Mac OS X released adding availability of contacts in the Mac Address Book to the Skype contact list, auto redial, contact groups, public chat creation, and an in-window volume slider in the call window. During several days in August, Skype users were unable to connect to full Skype network in many countries[21] because of a Skype system-wide crash which was the result of exceptional number of logins after a Windows patch reboot ("Patch Tuesday").[22] In November, there was controversy when it was announced that users allocated certain London 020 numbers (specifically those beginning '7870') would lose them, after negotiations with the provider of this batch of numbers broke down.[23]

By early 2008, the tumultuous ownership relations between the founders and eBay had resulted in significant leadership churn, with a succession of Skype presidents including Niklas Zennström, Rajiv Dutta, Alex Kazim, Niklas Zennström (again), and Henry Gomez, all holding that title at various points between 2005 and 2007. The business had failed to meet certain earn-out targets, growth was decelerating, product development had slowed significantly, and in October 2007 eBay took a $1.4 billion 'impairment' on the value of Skype, admitting it had overpaid, and now valuing the company at about $2.7 billion.[24]

In October 2008, analysis revealed TOM-skype — the Chinese version of Skype run by TOM Online — sends content of text messages and encryption keys to monitoring servers.[25]

For the six months after the departure of Zennström and Friis, Michael van Swaaij led the company as Interim CEO, until the appointment of Josh Silverman in February 2008.[26] Silverman was "widely viewed as bringing in stability to Skype after a tumultuous phase that followed the exit of the two Skype co-founders."[27] Under Silverman's two-and-a-half year tenure, the company focused its product efforts around video calling, ubiquity (gaining high penetration on smartphones, PCs, TVs, and consumer-electronic devices), building tailored offerings for enterprise customers, and diversifying revenue through subscriptions, premium accounts and advertising.

In advancing this strategy, Skype released many new products, substantially revamping its flagship Windows software (3.8 -> 4.0), and its Mac OS and Linux software; while introducing new software products for smartphones, and consumer electronics. In 2009, Skype 4.0 was released, featuring full-screen high-quality video calling.[28] the Linux client was updated, and an iPhone application was launched which topped the charts with over 1M downloads in its first two days.[29] Skype also announced the launch of its software for the Android platform.[30] Rounding out its ubiquity push, in 2010 Skype announced deep integration of Skype software into the IP-connected TVs from Panasonic, Samsung and Sony.[31]

During this period Skype also discontinued lesser-used services such as support for the "Skype Me" presence indicator, which meant that a user was interested in receiving Skype calls from a non-contact. Skype also discontinued its SkypeCast service without explanation and added internal monthly and daily usage caps on their SkypeOut subscriptions, which had been advertised as "unlimited". Skype also discontinued its "dragonfly" feature, a community-generated yellow-pages product, and other features which were deemed to be under-performing or a distraction to management. Many users and observers had commented on the high rate of dropped calls and the difficulty reconnecting dropped calls. Updates including versions for the SonyPSP hand-held gaming system, version 2.0 for Linux with support for video-conferencing.

As part of its efforts to diversify revenues, Skype launched in April 2008 Skype for SIP, a service aimed at business users. At that time around 35 per cent of Skype's users were business users.[32] In targeted premium products to consumers, Skype launched new monthly premium subscriptions products in May 2010.[33]

Marketing efforts were also re-vamped, with a particular focus on innovative partnerships with TV broadcasters to integrate Skype into their programming. The Oprah Winfrey Show began using Skype regularly to host video calls between Oprah and her viewers at home, culminating in a show dedicated exclusively to the wonders of Skype ("where the Skype are You", aired first in May 2009).[34] Skype also became commonly used by network news stations around the world, as a cost-effective replacement for sending satellite trucks, and enabling fast response from citizen journalists. Skype was also integrated into scripted TV programming, such as Californication; and in the seventh season of the U.S. syndicated version of the British game show Who Wants To Be a Millionaire in a new Ask the Expert video chat lifeline.

These efforts led to dramatically accelerating growth of Skype's Connected Users and Paying Users in 2008 and 2009.[35] By 2009 Skype was adding about 380,000 new users each day;[36] and by 2010, Telegeography estimated that Skype accounted for 25 per cent of the world's international calling minutes. According to their research, the overall international calling market grew a tepid 5 to 6 per cent annually in 2010. "Skype, however, has seen a huge uptick in growth, particularly in the last two years."[37]

In January 2010, Josh Silverman was recognized for his accomplishments at Skype by being named First Runner Up in the TechCrunch "Crunchies" award for "Best CEO", beaten only by Mark Pincus of Zynga.[38]

Building on the revitalization which had begun in 2008, eBay announced, in April 2009, plans to spin off Skype through an initial public offering in 2010.[clarification needed][39][40][41] In August, Joltid filed a motion with the U.S. Securities and Exchange Commission, seeking to terminate a licensing agreement with eBay which allows eBay (and therefore Skype) to use the peer-to-peer communications technology on which Skype is based. If successful, this may have caused a shutdown of Skype in its current form, and made an IPO challenging to execute.[42] In September, eBay announced the sale of 65 per cent of Skype to a consortium of Index Ventures and Silver Lake Partners.[43] Early in September, Skype shut down the Extras developer program.[44] In November Skype settled the Joltid litigation and acquired all Skype technology in exchange for equity in the company[45] and eBay completed the sale of 70% of Skype to a consortium comprising Silver Lake Partners, Joltid, CPPIB, and Andreessen Horowitz for approximately $2 billion, valuing the entire business at US$2.75 billion.[46]

In May 2010, Skype 5.0 beta was released, with a capacity to support group video calls involving up to four participants. Also in May, Skype released an updated client for the Apple iPhone that allowed Skype calls to be made over a 3G network. Originally, a 3G call subscription plan was to be instituted in 2011, but Skype eventually dropped the plan.[47]

In June 2010, following the rapid departure of Daniel Berg, the Chief Technology Officer, and then Chief Development Officer Madhu Yarlagadda, Mark Gillett, an operating partner at Silver Lake Partners, assumed the role of Chief Development Officer, taking responsibility for development of Skype's client software, cloud services and product management following a period of several months working closely with Joshua Silverman to drive the transformation of the business, and the acceleration of cross platform and mobile product delivery.[citation needed]

In October 2010, Skype announced the appointment of Tony Bates as CEO; Bates was a senior VP at Cisco and was responsible for its multi-billion-dollar enterprise, commercial and small business division.[49] On 14 October 2010, Skype 5.0 for Windows was released with a number of improvements and feature additions, including a Facebook tab to allow users to SMS, chat with, or call their Facebook friends via Skype from the News Feed.[50] The "Search for Skype Users" option was omitted from this version.[51]

On 14 January 2011, Skype acquired Qik, a mobile video-sharing platform.[citation needed] In March 2011, Skype named Jonathan Chadwick as its new Chief Financial Officer and confirmed that Mark Gillett would serve full-time as Chief Development and Operating Officer [52] following the departure of Chief Financial and Administrative Officer Adrian Dillon.

On 10 May 2011, Microsoft announced it had agreed to acquire Skype for $8.5 billion.[53] This marked a 300% increase in value for the company in the three years since the eBay write-down in October 2007. This constitutes Microsoft's largest ever acquisition.[54] It was announced that Skype will become a division within Microsoft, with Skype's former CEO Tony Bates —now its president —reporting to Microsoft CEO Steve Ballmer.[55] The price Microsoft agreed to pay for the company is 32 times Skype's operating profits.[56] According to the Financial Times this raises fears of a new tech bubble.[56]Ars Technica and the BBC have questioned the value for Microsoft in the purchase.[57][58] Microsoft's acquisition of Skype got EU approval on 7 October 2011.[59]

In October 2012, one year after the closure of the Skype acquisition, the newly formed Skype Division took responsibility for Microsoft's other VoIP and Unified Communications product Microsoft Lync.[60]

On July 11, 2013, Microsoft’s then-CEO Steve Ballmer announced a reorganization of Microsoft along functional lines and with four engineering groups each led by a senior leader.[61] Microsoft’s new Applications and Services Group, led by Executive Vice President Qi Lu includes Skype along with Bing and Microsoft Office.[1]

The Skype North American headquarters was opened in early 2013 after the design was completed by San Francisco architect firm Blitz. Located in Palo Alto, California, the space is designed to encourage interaction and spontaneity, while also introducing a sense of humor into the workplace. Fake lawn, cushions that look like boulders, open spaces, and high ceilings accommodate 250 employees in a 5,000 square metres (54,000 sq ft) building. The Palo Alto headquarters also houses a games room complete with a pool table and table football machine. The office's silver LEED Silver certification means that it received between 50 and 59 points for its environmentally friendly construction.[62][63][64]

In its 2008 Annual Report, eBay admitted to an ongoing dispute between it and Joltid Ltd. over the licensing of its peer-to-peer "Global Index" technology in its application.[65] It announced that it terminated a standstill agreement, allowing either company to sue. On 1 April 2009, eBay filed with a UK court to settle the legal dispute. A few days later, eBay announced the planning of a public stock offering in 2010 to spin off Skype as a separate, publicly owned company.[39] Some media outlets characterized the proposed sale and ongoing provision of Skype as being under threat because of the concurrent dispute.[66][67]

On 1 September 2009, a group of investors led by Silver Lake bought 65% of Skype for $1.91 billion.[68][69] This prompted Joltid to countersue eBay on 17 September 2009.[70]

Both settled the simultaneous suits in November, resulting in Joltid's part-ownership of the newly formed Skype Limited. The final holding share were with Silver Lake reducing their share to 56%, Joltid entered at 14%, and eBay retained 30%.[71]

StreamCast Networks filed a complaint in U.S. District Court in Los Angeles, alleging theft of its peer-to-peer technology and violation of the "Racketeer Influenced and Corrupt Organizations" statute. The complaint, titled; StreamCast Networks Inc v. Skype Technologies, S.A., was filed on 20 January 2006 in Federal Court in the Central District of California and assigned Case Number, 2:2006cv00391. The $4.1 billion lawsuit did not name Skype's parent company, eBay, when initially filed. Streamcast's lawsuit was subsequently amended on 22 May 2006 to include eBay and 21 other party defendants.

In its lawsuit, Streamcast sought a worldwide injunction on the sale and marketing of eBay's Skype Internet voice communication products, as well as billions of dollars in unspecified damages. The lawsuit was finally dismissed in a decision filed on 19 January 2007.[72]

On 1 June 2006, Net2Phone (the Internet telephone unit of IDT Corp.) filed a lawsuit against eBay and Skype accusing the unit of infringing U.S. Patent 6,108,704, which was granted in 2000.[73] The lawsuit was settled between the parties in 2010.[74]

Niklas Zennström, then chief executive of Skype, told reporters that its joint venture partner in China was operated in compliance with domestic law. "TOM Online had implemented a text filter, which is what everyone else in that market is doing," said Mr Zennström. "Those are the regulations," he said. "I may like or not like the laws and regulations to operate businesses in the UK or Germany or the US, but if I do business there I choose to comply with those laws and regulations. I can try to lobby to change them, but I need to comply with them. China in that way is not different."[78]

In September 2005, the French Ministry of Research, acting on advice from the General Secretariat of National Defence, issued an official disapproval of the use of Skype in public research and higher education; some services are interpreting this decision as an outright ban. The exact reasons for the decision were not given.

Starting in November 2010, Skype has been participating in a U.S. Government spy program titled PRISM, allowing the National Security Agency (NSA) unfettered access to people's chats and video and audio communications. However, it was not until February 2011 that the company was formally served with a directive to comply, signed by the attorney general.[80]

In March 2013, the company issued transparency reports.[81] confirming long held beliefs that Skype responds to requests from governments. Microsoft's General Counsel wrote to the US Attorney General, outlining the company's concerns in July 2013 in a [82] blog from Brad Smith including a copy of the letter to the US attorney.